Gail, 15th February 2013

7/29/2019 Gail, 15th February 2013

1/12

Please refer to important disclosures at the end of this report 1

EBITDA 2,002 1,761 13.7 1,380 45.0

EBITDA margin (%) 16.0 15.6 41bp 12.1 390bp

Source: Company, Angel Research

For 3QFY2013, GAIL India (GAIL) reported a better-than-expected profit due to

higher-than-expected profit from natural gas trading segment.

The companys top line grew by 10.8% yoy to

`12,474cr (above our estimate of `11,986cr), mainly due to higher-than-

expected sales in the natural gas trading segment, which grew by 10.6% yoy

`10,118cr respectively. The companys fuel subsidy burden stood at `700cr in

3QFY2013.

GAILs EBITDA improved by 13.7% yoy to

`2,002cr in 3QFY2013 and EBITDA margin improved by 41bp yoy to 16.0%,

mainly due to better petrochemical and LPG segment EBIT which grew by 13.4%

and 93.8% yoy to `439cr and `592cr, respectively.

Other income increased by 622.2% yoy to

`154cr, leading the net profit to increase by 17.7% yoy to `1,285cr (above our

estimate of `1,147cr).

Over the past one year, gas production from the KG

basin has declined significantly. Further, we do not expect any meaningful

increase in the production at KG D6 over the coming two years. Hence, we expect

utilization levels for GAILs pipelines to remain low during FY2013-14. Moreover,

a cap on the gas marketing margin (which is currently under review by the

Petroleum and Natural Gas Regulatory Board (PNGRB)) would remain anoverhang on the stock. Hence,

% chg 29.9 24.5 19.0 16.1

% chg 13.4 2.6 21.1 2.9

OPM (%) 16.8 14.4 15.3 15.3

P/E (x) 11.9 11.6 9.6 9.3

P/BV (x) 2.2 2.0 1.7 1.5

RoE (%) 19.7 17.9 19.0 17.0

RoCE (%) 22.4 19.3 20.0 18.1

EV/Sales (x) 1.2 1.1 0.8 0.6

EV/EBITDA (x) 7.3 7.4 5.2 4.2


CMP `334

Target Price -

Investment Period -

Stock Info

Sector

3,757

Bloomberg Code

Shareholding Pattern (%)

Promoters 57.3

MF / Banks / Indian Fls 16.5

FII / NRIs / OCBs 15.2Indian Public / Others 11.0

Abs. (%) 3m 1yr 3yr

Sensex 4.7 9.2 20.7

GAIL (4.9) (13.3) (18.7)

42,412

401/303

67092.72

0.8

Oil & Gas

Avg. Daily Volume

Market Cap (` cr)

52 Week High / Low

Net debt (`cr)

10

19497.18

5896.95

GAIL.BO

GAIL@IN

Beta

Face Value (`)

BSE Sensex

Nifty

Reuters Code

Tel: 022 - 3935 7800 Ext: 6821

[email protected]

Tel: 022- 39357600 Ext: 6841

[email protected]

Performance Highlights

3QFY2013 Result Update | Oil & Gas

February 14, 2013


2/12

GAIL | 3QFY2013 Result Update

February 14, 2013 2

Exhibit 1:3QFY2013 performance (Standalone)

COGS 9,441 8,380 12.7 9,163 3.0 26,688 22,395 19.2Total operating expenditure 10,472 9,499 10.2 9,981 4.9 29,642 24,813 19.5

EBITDA margin (%) 16.0 15.6 12.1 15.1 16.8

Other income 154 21 622.2 237 (34.9) 429 202 112.3

Depreciation 242 198 22.7 249 (2.7) 708 576 23.0

Interest 55 21 166.2 26 111.3 140 64 118.9

PBT margin (%) 14.9 14.2 12.1 14.1 15.5

Total tax 574 507 13.3 388 47.8 1,513 1,488 1.7

% of PBT 30.9 31.7 28.3 30.8 32.3

Exceptional items - - - - -

PAT margin (%) 10.3 9.7 8.7 9.7 10.5



3/12


February 14, 2013 3

Exhibit 2:Segmental performance (Standalone)

NG trading 10,118 9,150 10.6 9,697 4.3 29,057 23,930 21.4

Petrochemical 1,107 878 26.1 880 25.8 2,561 2,453 4.4LPG & liquid hydrocarbons 1277 965 32.3 769 66.0 3119 2768 12.7

Transmission NG 989 1087 (9.0) 985 0.5 2889 3006 (3.9)

Transmission LPG 81 122 (33.5) -4 (2171.8) 190 346 (45.1)

Gailtel - - - - -

Others 43 34 26.2 76 (42.7) 175 82 113.4

Less: Inter segmental 1142 976 16.9 1041 9.6 3068 2759 11.2

NG trading 299 323 (7.5) 245 22.0 1,039 923 12.6

%EBIT 33.9 28.3 39.6 28.0 25.9

Petrochemical 439 387 13.4 418 5.1 1,053 1,035 1.7

%EBIT 39.7 44.1 47.5 41.1 42.2

LPG & Liquid hydrocarbons 592 305 93.8 66 790.8 1,096 886 23.7

%EBIT 46.4 31.6 8.6 35.1 32.0

Transmission NG 620 621 (0.2) 605 2.4 1,792 1,829 (2.0)

% EBIT 62.6 57.1 61.4 62.0 60.8

Transmission LPG 13 78 (82.9) -49 (127.1) 35 219 (84.0)

% EBIT 16.4 63.8 1254.4 18.4 63.3

Gailtel - - - - -

% EBIT - - - - -

Others (83) (44) 91 7 (1301.7) (68) (159) (57)

% EBIT - - - - - -

% EBIT 15.1 14.8 11.4 14.2 15.9

Less: Interest 55 21 166.2 26 111.3 140 64 118.8

Less: Unallocable exp 34 (52) - 108 - 110 (45) -


Exhibit 3:3QFY2013 Actual vs Angel estimates

Net sales 12,474 11,986 4.1

EBITDA 2,002 1,870 7.1

EBITDA margin (%) 16.0 15.6 45bp

Adj. PAT 1,284 1,147 11.9



4/12


February 14, 2013 4

The companys top-line grew by 10.8% yoy to

`12,474cr (above our estimate of `11,986cr) mainly due to higher-than-expected

performance from the petrochemicals and natural gas trading segment which

grew by 26.1% and 10.6% yoy to`

1,107cr and`

10,118cr respectively. Thecompanys fuel subsidy burden stood at `700cr in 3QFY2013, compared to

`536cr in 3QFY2012 and `786cr in 2QFY2013.

Exhibit 4:Net sales grew by 10.8% yoy

8,8679,699

11,260

10,45511,089 11,361

12,474

25

.0

19

.7

34

.6

17

.62

5.0

17

.11

0.8

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

(%)

(`cr)

Net Sales Net Sales growth (RHS)


Exhibit 5:GAILs subsidy share stood at 700cr

680567 536

1,397

700786

700

0

200

400

600

800

1,000

1,200

1,400

1,600


(`cr)

GAIL's subsidy share


Exhibit 6: Transmission volumes continue to decline

117119 119

116

110

106105

95

100

105

110

115

120

125


(mmscm

d)

NG Transmission volumes


The petrochemical and LPG segments EBIT grew

by 13.4% and 93.8% yoy to `439cr and `592cr, respectively. However, natural

gas trading and LPG transmission segments EBIT decreased 7.5% and 82.9% yoy

to `299cr and `13cr, respectively. However GAILs EBITDA improved by 13.7% yoy

to `2,002cr in 3QFY2013 and EBITDA margin improved by 41bp yoy to 16.0%.


5/12


February 14, 2013 5

Exhibit 7: EBITDA stood at `2,002cr

1,577 1,676

1,761

734

1,899

1,380

2,002

5.0

7.0

9.0

11.0

13.0

15.0

17.0

19.0

-

500

1,000

1,500

2,000

2,500


(%)

(`cr)

EBITDA EBITDA margins (RHS)


Other income increased by 622.2% yoy to

`154cr, whereas interest costs increased by 166.2% yoy to `55cr. Consequently,

the net profit increased by 17.7% yoy to `1,285cr, above our estimate of `1,147cr.

Exhibit 8: Adjusted PAT increased by 17.7% yoy

985

1,0

94

1,0

91

483

1,1

34

985

1,2

85

11.0

30.6

12.8

(38.3)

15.1

(10.0)

17.7

(50.0)

(40.0)

(30.0)

(20.0)

(10.0)

-

10.0

20.0

30.0

40.0

-

200

400

600

800

1,000

1,200

1,400


(%)

(`cr)

Adj. PAT Adj. PAT growth (RHS)



6/12


February 14, 2013 6

Investment arguments

GAILs asset portfolio includes prospective

basins such as Myanmar fields and CBM blocks. We view these blocks as a

potential upside for the stock. Of the 27 exploratory blocks owned by GAIL, nine

blocks have potential hydrocarbon discoveries. Any material success in the form of

a major discovery could be a key catalyst for the stock.

GAIL is expanding its

transmission capacity from 170mmscmd currently to 300mmscnd in the next two

years. However, gas production from the KG basin has declined significantly over

the past one year. Looking ahead, we do not expect any meaningful increase in

production at KG D6 in the coming two years. Hence, we expect utilization levels

for GAILs pipelines to remain low during FY2013-14.

Outlook and valuation

Over the past one year, gas production from the KG basin has declined

significantly. Further, we do not expect any meaningful increase in KG D6

production over the coming two years. Hence, we expect utilization levels for

GAILs pipelines to remain low during FY2013-14. Further, a cap on gas

marketing margin (which is currently under review by PNGRB) would remain an

overhang on the stock. Hence,

Exhibit 9: SOTP valuation (FY2014E)

NG transmission (EV/EBITDA 4.0x) 16,111 127

LPG transmission (EV/EBITDA 4.0x) 1,469 12

NG trading (EV/EBITDA 4.0x) 2,527 20

Petrochemicals (EV/EBITDA 4.0x) 9,021 71

LPG and liquid hydrocarbons (EV/EBITDA 4.0x) 6,419 51

E&P upsides (EV/boe 4.0x) 1,829 14

Investments (Book/Market Value X 80%) 2,868 23

Net debt (3,187) (25)



7/12


February 14, 2013 7

Exhibit 10: Key assumptions

Gas transmission volumes (mmscmd) 110 115

Gas trading volumes (mmscmd) 84 89Source: Company, Angel Research

Exhibit 11: Angel EPS forecast vs consensus

34.9 34.6 0.8

35.9 36.5 (1.6)


Exhibit 12: One-year forward P/E

0

100

200

300

400

500

600

700

800

Ma

r-07

Aug-0

7

Jan-0

8

Jun-0

8

No

v-0

8

Ap

r-09

Sep-0

9

Feb

-10

Ju

l-10

De

c-1

0

Ma

y-1

1

Oc

t-11

Ma

r-12

Aug-1

2

Jan-1

3

Shareprice

(`)

7x 10x 13x 16x 19x


Exhibit 13: Recommendation summary

RIL 855 - Neutral 2,72,755 - 12.6 12.0 1.3 1.2 8.0 7.3 12.4 11.8 8.6 8.9

ONGC 322 357 Accum. 2,75,914 11 11.2 9.4 1.8 1.6 5.5 4.3 17.0 18.2 16.9 19.0

Cairn India 312 383 Buy 58,086 23 5.1 5.7 1.0 0.9 3.4 3.1 21.9 17.0 21.3 16.6

Source: Angel Research

Company background

Incorporated in August 1984, GAIL is India's flagship transmission and distribution

natural gas company engaged in the businesses of natural gas, LPG, liquid

hydrocarbons and petrochemicals. The companys segments include natural gas

marketing, natural gas transmission, liquefied petroleum gas (LPG) transmission

projects and other hydrocarbon production. Currently, GAIL operates a natural

gas transmission network of ~8,000km, with a capacity of 170mmscmd. The

company also has 27 oil and gas exploration blocks and three coal bed methane

blocks. The company has also diversified into exploration and production and city

gas distribution (CGD).


8/12


February 14, 2013 8

Profit and Loss Statement (Standalone)

Gross sales 24,292 25,376 32,953 40,843 48,810 56,665

Less: Excise duty 516 379 494 562 732 850Net Sales 23,776 24,996 32,459 40,281 48,077 55,815

Other operating income - - - 117 - -

% chg 32.0 5.1 29.9 24.5 19.0 16.1

Total Expenditure 19,711 20,327 27,004 34,583 40,701 47,281

Net Raw Materials 16,452 17,609 22,006 30,437 35,822 42,160

Other Mfg costs 870 950 2,046 1,168 1,444 1,786

Personnel 577 621 753 607 715 841

Other 1,813 1,147 2,199 2,371 2,837 3,394

% chg 3.5 14.9 16.8 6.6 26.8 15.7

(% of Net Sales) 17.1 18.7 16.8 14.4 15.3 15.3

Depreciation & Amortization 560 562 650 791 996 1,840

% chg 4.4 17.2 17.0 4.6 27.0 4.9

(% of Net Sales) 14.7 16.4 14.8 12.4 13.3 12.0

Interest & other Charges 87 70 83 116 200 220

Other Income 797 541 519 432 359 215

(% of PBT) 18.9 11.8 9.9 8.1 5.5 3.2

Share in profit of Associates - - - - - -

% chg 9.9 8.6 14.4 1.9 22.5 2.3

Extraordinary Expense/(Inc.) - - - - - -

Tax 1,400 1,439 1,679 1,686 2,113 2,134

(% of PBT) 33.2 31.4 32.0 31.6 32.3 31.9

Add: Share of earnings of asso. - - - - - -

Less: Minority interest (MI) - - - - - -

Prior period items 10 - - - - -

% chg 7.8 12.0 13.4 2.6 21.1 2.9

(% of Net Sales) 11.8 12.6 11.0 9.0 9.2 8.2

% chg 7.8 12.0 13.4 2.6 21.1 2.9


9/12


February 14, 2013 9

Balance Sheet (Standalone)

Equity Share Capital 1,268 1,268 1,268 1,268 1,268 1,268Reserves& Surplus 13,501 15,655 17,985 20,356 23,767 27,308

Minority Interest - - - - - -

Total Loans 1,200 1,480 1,973 4,889 7,389 8,389

Deferred Tax Liability 1,326 1,390 1,633 1,769 1,769 1,769

Other Long Term Liabilities - - 15 278 278 278

Long Term Provisions - - 289 338 338 338

Gross Block 17,604 17,904 22,144 26,307 28,807 33,307

Less: Acc. Depreciation 8,554 9,115 9,741 10,449 11,445 13,284

Capital Work-in-Progress 2,426 5,426 5,846 7,942 8,530 7,330

Goodwill - - - - - -

Long Term Loans and advances - - 1,687 1,996 1,996 1,996

Other non-current assets - - 73 272 272 272

Cash 3,456 4,343 2,131 931 7,583 11,576

Loans & Advances 6,621 7,606 4,596 5,211 5,211 5,211

Other 2,159 1,935 2,692 3,325 3,622 4,205

Mis. Exp. not written off - - - - - -


10/12


February 14, 2013 10

Cash Flow (Standalone)

Profit before tax 4,204 4,578 5,240 5,340 6,539 6,690

Depreciation 560 562 650 792 996 1,840Change in Working Capital (749) 1,453 722 91 2,832 913

Others (797) (541) (2,051) (310) (359) (215)

Less: Other income - - - - - -

Direct taxes paid (1,394) (1,375) (1,484) (1,425) (2,113) (2,134)

(Inc.)/ Dec. in Fixed Assets (2,256) (3,300) (4,632) (6,618) (3,088) (3,300)

(Inc.)/ Dec. in Investments (246) (336) (509) (965) - -

Others 797 220 412 442 - -

Other income - - - - 359 215

Issue of Equity - - - - - -

Inc./(Dec.) in loans (66) 280 830 3,037 2,500 1,000

Dividend Paid (Incl. Tax) (1,039) (1,113) (1,109) (1,253) (1,015) (1,015)

Others (31) 287 (108) (330) - -

Inc./(Dec.) in Cash (1,017) 715 (2,040) (1,200) 6,651 3,994


11/12


February 14, 2013 11

Key Ratios

P/E (on FDEPS) 15.1 13.5 11.9 11.6 9.6 9.3P/CEPS 12.6 11.4 10.1 9.5 7.8 6.6

P/BV 2.9 2.5 2.2 2.0 1.7 1.5

Dividend yield (%) 2.1 2.2 2.2 3.0 2.4 2.4

EV/Sales 1.6 1.5 1.2 1.1 0.8 0.6

EV/EBITDA 9.4 8.0 7.3 7.4 5.2 4.2

EV/Total Assets 2.2 1.9 1.7 1.5 1.1 0.9

EPS (Basic) 22.1 24.8 28.1 28.8 34.9 35.9

EPS (fully diluted) 22.1 24.8 28.1 28.8 34.9 35.9

Cash EPS 26.5 29.2 33.2 35.0 42.7 50.4

DPS 7.0 7.5 7.5 9.9 8.0 8.0

Book Value 116.4 133.4 151.8 170.5 197.4 225.3

EBIT margin 14.7 16.4 14.8 12.4 13.3 12.0

Tax retention ratio 66.8 68.6 68.0 68.4 67.7 68.1

Asset turnover (x) 1.9 1.7 1.8 1.6 1.7 2.0

ROIC (Post-tax) 18.8 19.2 17.9 14.0 15.6 16.6

Cost of Debt (Post Tax) - - - - - -

Leverage (x) - - - - - -

Operating ROE 18.8 19.2 17.9 14.0 15.6 16.6

ROCE (Pre-tax) 21.3 22.1 22.4 19.3 20.0 18.1

Angel ROIC (Pre-tax) 32.3 38.3 38.1 28.5 33.0 34.2

ROE 20.2 19.8 19.7 17.9 19.0 17.0

Asset Turnover (Gross Block) 1.4 1.4 1.6 1.7 1.7 1.8

Inventory / Sales (days) 9.0 9.0 8.4 8.3 8.2 8.3

Receivables (days) 20 20 18 18 17 17

Payables (days) 70 86 69 67 77 77

WC cycle (ex-cash) (days) 4 (2) (13) (14) (23) (32)

Net debt to equity (0.3) (0.3) (0.1) 0.0 (0.1) (0.2)

Net debt to EBITDA (1.0) (1.1) (0.5) 0.1 (0.5) (0.8)

Interest Coverage (EBIT/Int.) 40.3 58.7 58.0 43.1 31.9 30.4


12/12


February 14 2013 12

Research Team Tel: 022 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies

referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and

risks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make

investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this

document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliablesources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as thisdocument is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report .Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. WhileAngel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced,

redistributed or passed on, directly or indirectly.

Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or

other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or inthe past.

Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in

connection with the use of this information.

Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, pleaserefer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited andits affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement GAIL

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

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Gail, 15th February 2013

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